Question

Compare and contrast the price elasticity of supply and price elasticity of demand, and define income elasticity and how it distinguishes normal and inferior goods.

Answer 1

• The price elasticity of demand refers to the change in quantity demanded with respect to the change in the price level while the price elasticity of supply refers to the change in the quantity supplied with respect to the change in the price level.
• If the demand or supply is elastic then any change in the price level will cause a greater change in the quantity demanded.
• If the demand or supply is inelastic, any change in the price level will cause a smaller or negligible change in the quantity demanded.
• And if the demand or supply is unit elastic, then any change in the price level will cause an equal change in the quantity demanded.
• The Income elasticity of demand refers to the change in the quantity demanded with respect to the change in income of consumer's.
• Normal goods have positive income elasticity of demand. This means that when the income of consumer's rise, then their demand for certain goods like clothes, food etc Increases and when the income decreases, their demand also decreases.
• Inferior goods have negative income elasticity of demand. This means that when the income of people rise, their demand for certain goods decreases for example people will demand more luxurious cars rather than cheaper cars. Similarly when their income falls, their demand increases.